How would you like to pay a super-high price to borrow money that already belongs to you? Sounds ridiculous, right? But that's pretty much what happens to many folks at tax time in the crazy world of RALs, or refund anticipation loans.
You may be tempted by tax-time advertisements for "Fast Cash Refunds," "Express Money," or "Instant Refunds." These ads will offer to get you your refund in just a day or two, or even on the spot. Beware!
Many of these "fast refunds" are really LOANS, refund anticipation loans. When you get a RAL, you're borrowing against your own tax refund money. And RALs are often marketed to people who need money the most — low- and moderate- income workers who receive the Earned Income Tax Credit.
RALs are extremely expensive. Loan fees typically range from $30 to $90, which translates into Annual Percentage Rates (APRs) of about 60% to over 700%. If you paid those rates on all your borrowing you'd probably go broke! And all to get your tax refund just a few days earlier than you can for free from the IRS. You're lining someone else's pockets with YOUR hard-earned money! RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.
In addition to their high costs, RALs can be risky. For a tax refund of $2000, you might pay: RAL loan fee: $75 Electronic filing fee: $40 Combine that with the fee you will need to pay to the tax preparer: $100 Total: $215. This is over 10% of your refund! This RAL has an APR (Annual Percentage Rate) of 142% if it beats the IRS by 10 days.